Graco Inc (GGG) 2015 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter and year-end 2015 conference call for Graco Inc. If you wish to access the replay for this call, you may do so by dialing 1-888-203-1112 within the United States or Canada. The dial-in number for international callers is 719-457-0820. The conference ID number is 2790548. The replay will be available through January 30, 2016.

Greco has additional information available in a PowerPoint slide presentation which is available as part of the webcast player.

At the request of the Company, we will open the conference up for questions and answers after the opening remarks from management.

During this call, various remarks may be made by management about their expectations, plans and prospects for the future. These remarks constitute forward-looking statements for the purpose of Safe Harbor provisions of the Private Securities Litigation Reform Act. (technical difficulty) of the Company's most recent quarterly report on Form 10-Q. These reports are available on the Company's website at www.Graco.com, and the SEC's website at www.SEC.gov. Forward-looking statements reflect management's current views and speak only as of the time they are made. The Company undertakes no obligation to update these statements in light of new information or future events.

Please note today's call is being recorded.

I will now turn the conference over to Caroline Chambers, Vice President, Corporate Controller and Information Systems.

Good morning everyone. I am here this morning with Pat McHale and Christian Rothe. Our conference call slides are on our website and provide additional information on our quarter.

Last evening, Graco reported fourth-quarter sales of $326 million, net earnings of $54 million, and diluted net earnings of $0.94. Foreign exchange continued to be a headwind for us and in the fourth quarter the effect of foreign translations rates reduced sales by $12 million and reduced net income by $5 million, or $0.09 per diluted share.

Sales from businesses acquired in the past 12 months increased sales in the fourth quarter by $13 million, but contributed less than $1 million to earnings. A reconciliation of our operating earnings is included on Page 10 of our slide deck.

For the year, the effect of foreign exchange was offset by favorable volume, price, and lower factory costs. The effect of acquired businesses reduced operating margins by 1 percentage, point and increased unallocated corporate expenses, primarily stock compensation and pension, also reduced operating margins by 1 percentage point.

Results for the fourth quarter also include $1 million from favorable post-closing adjustments related to the sale earlier this year of the liquid finishing businesses that were held separate. Year-to-date results include after-tax gain on sales and dividend income from the investment of $141 million or $2.40 per diluted share.

The effective tax rate for the quarter was 27%, consistent with the quarter in 2014. The federal R&D tax credit was reinstated in the fourth quarter and the Company recognized the full-year benefit $3 million.

Cash provided by operating activities is $190 million for the year. This is net of $67 million of divestiture related expenses, including taxes, transaction costs, and a contribution to the Company's charitable foundation.

We continued with share repurchases during the fourth quarter, and our outstanding share count is below 56 million at year-end.

Fourth-quarter unallocated corporate expenses were slightly below last year, and for the full year approximately $5 million above the prior year, primarily due to increased pension and stock compensation. Unallocated costs related to the new central warehouse were slightly less than $1 million in the fourth quarter, the same as the prior year.

Looking at 2016, foreign exchange will continue to be a headwind for us. At today's exchange rates and assuming the same volumes, mix of products, and mix of business by currency, we expect to see an unfavorable effect of currency translation of approximately 2% on sales and 5% on earnings with the greatest effect in the first half. Also going into 2016, we expect to realize modest price increases, lower material costs and improved factory efficiencies, though factory performance is dependent on volume. Capital expenditures are expected to be approximately $40 million without taking into account possible building expansion for our Contractor segment, which is nearing full capacity. Full-year unallocated corporate expenses in 2016 are expected to be similar to 2015.

The tax rate is expected to be approximately 31% in 2016. Since the R&D tax credit has already been extended, the approximately $3 million expected annual benefit will be recognized over the course of the year.

I'll turn the call over to Pat now for further segment and regional discussion.

Thanks Caroline. Good morning everyone. In the fourth quarter, we posted 6% organic growth on a constant currency basis led by our Contractor and Industrial businesses in the Americas. For the full year 2015, more than 90% of our dollar growth came from these two slices.

Clearly, we are in a divergence of economies and end markets. The brightest spots are the residential and commercial construction markets in the United States. Our Contractor Americas business has essentially 100% exposure to those end markets. In the Industrial Americas, nearly a third of that business has exposure to residential and commercial construction through our spray foam products as well as implant applications for windows, doors, cabinets, furniture and white goods. If you add in automotive manufacturing, the Industrial Americas business has more than half its sales exposed to consumer-facing end markets. Industrial Americas and Contractor Americas were 46% of our sales in 2015, and three-quarters of those sales have exposure to the consumer facing end markets of res and nonres construction and automotive. Those markets have been good and we expect them to continue to be solid as we enter 2016.

Excluding acquisitions and on a constant currency basis, our only segment and/or region with a year-over-year decline in the quarter was our Process segment, which was down 2%. This segment has some oil and gas exposure which has dampened results.

For the full year, we achieved our mid-single-digit growth outlook, but just did miss our target of growth in every region and reportable segment as Asia-Pacific was down year-over-year by a little less than $1 million. Our manufacturing, purchasing, and customer support and training operations performed at a high level during 2015, and contributed significantly to our earnings performance. With moderate volume growth, I believe these organizations are well-positioned to contribute again in 2016.

Despite the challenges we face in many end markets and geographies, we continue to press forward with our long-term growth initiatives. We're focused on growing and have a great deal of conviction in our business plans.

A few notable data points on the quarter. Contractor Americas grew 21% in the quarter and achieved their second-half goal of double-digit growth. Same-store sales were up strong double digits in the quarter, while sales to the home center channel grew in the low single digits. If you recall, home center was flat in Q2, up nicely in Q3, and reverted down to the single digits in Q4. Paint store was the opposite with strong growth in Q2 and Q4, and flat in Q3.

While we are seeing some variability from quarter to quarter, the overall double-digit growth for the first half, second half and full year was an excellent performance. Out the door sales for both channels were good throughout the year, and were not reflective of the variability we saw from quarter to quarter.

In our EMEA region, we saw a little slowing of our growth rate in the developed economies of the West, while Central Eastern European markets continue to perform well. Russia and the Middle East remained a challenge in Q4, and largely offset our growth in the West. We expect the large declines in Russia to ease as we move through Q1, but don't expect growth in Russia in 2016.

In Asia-Pacific, we saw growth in Australia and New Zealand, in India, while China was down high single digits in the quarter. Recall that we grew in China in Q3, so the spottiness of that market remains an ongoing concern.

Moving onto our outlook, please note that we've got additional commentary in our slide deck. We initiated our 2016 outlook in our earnings release late last night with an expectation of low single digit organic constant currency growth for the first quarter and low to mid single digit growth for Graco worldwide for the full year with growth in every region and reportable segment. We continue to operate in a difficult macro environment for a large portion of our business and with 18 consecutive quarters of record same quarter sales, nearly all of our comps are tough at this point.

Notably, we are up against the 27% growth that the Contractor Americas business posted in the first quarter of 2015. We are targeting high single-digit growth for Contractor Americas for the full year 2016, but against tough the comps in the first quarter and fourth quarter, I am expecting that we are going to be lumpy from quarter to quarter in Contractor Americas, and I wouldn't be surprised to see a number closer to flat in Q1. We have some product launches planned for early Q2 which should bring us back to that high single-digit pace for the first half.

Regionally, for the full year, we are targeting mid-single-digit growth in the Americas and low single-digit growth in EMEA and Asia-Pacific.

Regarding capital deployment, our priorities continue to be organic growth investments and acquisitions, and we continue to be opportunistic on share repurchases. With the recent pullback, we've been more active in the market.

This month, we also completed acquisitions in our Process segment. In total, we spent $49 million and the acquired businesses have trailing 12-month sales of about $16 million. These businesses expand our QED landfill and groundwater remediation portfolio. With that, operator, we are ready for questions.

(Operator Instructions). Joseph Ritchie.

Good morning. This is Evelyn Chow on for Joe. He sends his regrets for not being on today.

Very nice quarter. I just wanted to dig into Contractor margins a bit. He had very strong incrementals in what I think is typically the lowest margin quarter for the business. And correct me if I'm wrong, but I think it's actually the best 4Q margin you've had in Contractor since 2007. So maybe what are the puts and takes on the margins as you saw as it relates to product launches, maybe potential mix up, or just really strong volume leverage?

Good morning. It's Christian. Just a couple of quick comments on that. You're right, it was a very strong fourth quarter for the Contractor business. Really it's just a convergence of a few different items. The first one is of course paint store sales were very strong in the quarter, and that's a more profitable business segment for us than the Contractor business. In addition to that, from a launch perspective, and Pat talked about the fact that we have some product launches that are happening in Q2, so some of those costs that normally would come in the fourth quarter have now been pushed back a little bit as we go into 2016. So, it was a lighter expense month, or lighter expense quarter, sorry, and on top of that a strong mix.

Thanks Christian. That's helpful. I guess maybe turning to Industrial for a second, I know not to read too much into one quarter of growth or two of quarters of growth. Maybe just thinking about the exposure there, I think roughly 20-something% of the segment is auto-related and we've seen increasing concerns on potentially peaking North America auto SAR. Do you guys have any concerns as to the sustainability of growth in that end market?

Going back to the exposures in Industrial Americas, nearly a third of that business has exposure to the residential and commercial construction markets. So that is spray foam, window manufacturing, door manufacturing, cabinets, those types of things. And then if you add automotive onto that, that gets to be about half of the sales. Both of those end markets we expect to be pretty decent here in 2016 and give us good opportunities.

Thanks, that's helpful. I guess maybe the last one from me, switching gears. I saw you did some acquisitions post-year-end in Process, I think about $49 million in value. If you can, what are those acquisitions, and maybe what is the strategic rationale for doing them?

Sure. We started building up an environmental systems business back in 2013 with the acquisition of QED, which really focused on landfill and groundwater remediation markets. And the recent acquisitions that we have done were adding to our product portfolio in that space. So they are landfill gas wellheads, portable and fixed gas analyzers used not only in landfills, but also in biogas applications and in some medical applications.

And do you expect these acquisitions to be accretive in 2016?

Mildly accretive. So they are relatively small.

Okay. Thanks very much guys.

Mike Halloran.

Good morning guys. So let's start with the order rates for the fourth quarter. The growth rate slowed towards flattish year-over-year. Could you break that out by some of the verticals you're seeing? It sounds like you still have confidence in a lot of the consumer-facing pieces. Was there a dichotomy between the consumer-facing and the industrial, kind of core industrial stuff?

It's Christian. So, as we went through the quarter, October was -- we were up, November we were down, December we were up again, and that kind of ended with a flat for the full quarter. From an end market -- or let's talk about segments for a second.

On the segment side, Contractor held up okay, in fact pretty well. If you look the Industrial and Process segments though, those did take a small step down as we went into the fourth quarter.

From a geography and product line perspective, it was pretty broad-based. Really the variability from week to week continues to happen for us. And as we look at what's happening in January also, we are still seeing that variability, but we are up for the month of January, again not that we can deduce a whole heck of a lot from that. Let's continue to wait and see how this quarter develops.

Makes sense. And then on the outlook, could you just bucket what's driving the move from low single digits to mid single -- to low to mid single digits as you move from the first-quarter guidance to the full-year guidance? And by bucket I mean beyond just comps changing a little bit for you, getting slightly easier. Are you guys assuming any sort of fundamental improvement from the environment, or is this just comps, new product introductions coming forward?

We are not assuming any improvement in the environment. Certainly we welcome that but not really expecting it and haven't built that is our plans. We got big comp in Contractor in Q1 and that's probably the biggest driver that would cause us maybe to be a little lower in Q1 than we are expecting to be for the full year. We do have new product launches and all our initiatives in place, so we've got I think plenty of opportunity to figure out how to have a decent year even in a tough environment.

Makes sense. Then last one on the acquisition. Could you give us some kind of framework for what sort of revenue contribution that would -- either on a trailing 12 months or what you guys are expecting for 2016? And then also is all of that revenue in the Process segment then?

Yes, that's about $16 million, it's all in Process.

Great. I appreciate the time guys.

Matt McConnell.

Thank you. Good morning. Could you just give a brief update on what you are seeing in the M&A pipeline? Do you think this will be a meaningful use of capital in 2016?

We continue to be active, and we've got a number of deals done of course the last 12 to 18 months. Currently, I don't see the pipeline as being particularly strong. Certainly, we would like to get something done that would move the needle, but looking at it right now, I would say it's probably slightly weaker than it has been.

Okay. And switching gears just a little bit to Contractor, was there any noticeable impact from weather in the fourth quarter in Contractor specifically?

No, we don't really pay too much attention to that. The weather is always good somewhere and always bad somewhere. It's a global business. So no, we didn't note anything on weather.

Okay. And what kind of growth in 2016 would necessitate new capacity additions there? And when might you make a decision there, and what kind of capital outlay might that require?

We've been contemplating what to do with space up there since the housing market peaked back in 2006/2007, and we evaluate it every year. We did take some action about a year or so ago to give them some more space, but obviously they had another very strong growth year. So, we are close. We don't have a plan. The team is doing their work. We just wanted to flag for folks that, should the team come forward sometime this year with plan, that it's possible that we could move forward.

Okay, great. Thank you.

John Franzreb.

Pat, you kind of highlighted the Contractor business as one of the main drivers of the mid-single-digit revenue growth. Can you talk a little bit about your expectations on the Process side of the business in the year ahead?

Yes. So, we are expecting the Process business in aggregate to put up growth next year. Obviously, it's going to be challenging for them to do that with some exposure to oil and gas, but they have exposure to a lot of other end markets and we've got a lot of initiatives underway. So we still have confidence at this point that the Process number can get some organic growth next year.

And you've kind of highlighted new product introductions over the past couple of quarters. Could you give us maybe two things. One, how did much did new products add to the top line for all of 2015? And maybe you can share with us the hurdle rates you use internally before you start on a new project?

Sure. I can't share with you the number that new products added to the top line. It's obviously not an easy metric. Some products replace other products; some products are incremental.

In terms of the process at Graco that we go through, we have a finance committee that meets every month, and we've got a format that people can use to come in and ask for capital. Typical returns on new product, I'll say the actual returns average in the 20s%, but there's a fair amount of variability around that.

And one last question. On distribution center costs, are they through? And besides what you said, mentioned on Contractor, are there any unusual expenses we should be aware of in the upcoming year?

We expect to have additional costs running through unallocated corporate next year associated with additional moves of some inventory. We expect that, overall, our unallocated corporate will be the same in 2016 as in 2015.

Okay. Thank you for taking my questions.

Kevin Maczka.

Good morning. So, on price, I think it was mentioned that there's some price assumed here in the organic guidance. Can you maybe comment on that, quantify that if that's possible? And how should we think about the favorable price-cost impact on margin next year?

Yes, we think it should be okay. Our price increase I think should be pretty typical and assuming that we get some volume, our factories and our purchasing groups are set up I think to have another good year. Our typical price realization is probably somewhere in that 1.5% to 2% kind of number. And if we can drive zero cost change, that gives us opportunities obviously to expand margins. So, again, volume will play a key role in that as we move through the year. If we can get a little bit of volume like we did this year, our factories generally do quite well.

In terms of incremental margins, they are normally strong. I think we typically start with about 40%, and then there's puts and takes on that. With that kind of normal price increase but lower volumes, positive but lower, is that still a fair way to think about the incremental margin expectation for next year, or could that be better with price-cost still favorable?

It's Christian. So, there's two ways that I look at it. The first one is, as you just described, I think generally that's correct with one exception, one or two exceptions, the first being that we do have more home center business on the Contractor side of our operations, and that does have a lower margin profile. So as we get growth out of that side of the business, that does have a little bit of a drag on the incrementals.

The other portion of that has to do with the fact that we have been spending somewhat more of these regional and product growth initiatives. And so that took us into the kind of low end of the 35% to 45% range for 2015 on an organic constant currency basis.

As you look forward to 2016 then, I think when you think about that thesis from an incremental margin perspective, it's probably correct. But if you do then put on top of that the FX, keep in mind we do have that impact that we are expecting now of 2% on the top line, and 5% on the net income line. So that will of course take the incrementals. If you're looking at it on an apples-to-apples currency basis, we're going to have a little bit of a headwind.

Got it, okay. And then can I just go back to Process quickly? I know you're expecting at least some growth there even though there's oil and mining and exposures like that that are not favorable right now. Can you give a little bit more color on what is underlying that, what you think gets better? Because that's a business that only had very minimal growth in 2015. And then can you just talk to the margin there? That was the one segment where the margin kind of took a step back in Q4.

I talk to the growth piece. We are running the normal Graco playbook with Process. And I'll say the thing that's different there is we've made a conscious decision the last two or three years to build up that business with an oil and gas initiative and some other segments that we think are attractive. So we do continue to invest in those businesses from I'll say a short-term expense and a longer-term capital standpoint to position them well for when their end markets are better. But we are running the standard Graco playbook. Each one of the business segments has new product development. We've got our normal growth initiatives. And our exposure to oil and gas and the mining markets aren't so great that we think it precludes us from getting some topline growth next year.

On the margin side of the equation, our expectation is that, over the long-term, this business can be at a 20% or better type of operating margin number. But it's going to take some time to get there, and it's going to take some volume to get there. So, in the short-term, if we are not getting volume, we are going to continue to have numbers similar to what you saw in 2015 with the potential of course with increment margins that happen with that volume growth.

Okay, got it. Thank you.

Matt Summerville.

Just a couple of quick ones. I think, Pat, in your prepared remarks, you mentioned China was down 9% in the fourth quarter. Was that a similar experience across the three business segments?

And then the other thing you've been talking about the last couple of quarters, you made some management changes I believe in Asia. Is that starting to provide any sort of relief to some of the pressures you're seeing there as well as beginning to drive higher conversion rates, which I think you've been disappointed with in the recent past? Thank you.

No, I didn't call out any specific number, but I said China was down high single digits in the quarter. But we also had growth in Q3. So it's been probably three years now that China has been pretty spotty for us. We have made a couple of management changes over there that longer-term we hope will have some positive impact. I'm not expecting that impact is going to be in Q1. Those folks are getting their feet on the ground.

Our larger disappointment in China, as we've talked about, has been the conversion rate on the Contractor side. And that's really what we are hoping the new management team will get us refocused on. But again, that's a longer-term action, and we should expect to see progress as we move forward.

Thank you.

Charley Brady.

Thanks. Good morning Pat. Can we just -- on the Industrial side, you mentioned the third that's kind of construction related and then that other chunk in the auto. Can you just maybe get a little more granular on the 50% that's not those markets? Because I think when people look at Industrial, given everyone else in industrial is having a pretty tough go at it, these non-construction, non-auto markets, I think people scratch their heads and say where is that growth coming from? Can you maybe get a little granular on that part of the business in Industrial?

Yes. So, our business gets cut into lots of pieces once you take the big chunks off. Our Industrial business has exposure to general industrial; we have rail; we've got of course all the resource segments. It's aerospace, farm and construction. It really gets broad-based after that.

Okay. Can you maybe talk a minute about Europe? Obviously, the Contractor guys in particular, I know it's a small piece of that business, but pretty decent growth in Europe in Contractor. Is that more of a function of a move away from brush and roller maybe accelerating, or just kind of broad-based Europe is kind of doing better than it was doing a few months ago?

No, I don't think there's a broad-based acceleration. That's an opportunity there that will continue to be an ongoing opportunity. The team has done a pretty good job. The new products that we have launched there the last of couple years have been successful. And the end markets in the west, particularly in the south, are definitely better than they were. So I think it's kind of combination of factors that has given the team there an opportunity to put up some decent numbers.

Okay. Just one more for me on Contractor. With the second-quarter product launches, given the commentary, you are going to get some push out in expense from Q4. Would you expect margins to be down year-over-year, or is there enough volume leverage to kind of offset that expense on a year-over-year basis do you think?

I think, on the margin side, we feel like there's going to be enough volume that we should be okay.

Just circling back to your question on EMEA Contractor, just to underscore Pat said, it is still a relatively small business, so you're going to have some movement from quarter to quarter. For the full year, although it was nice kind of growth for the quarter, the full year we are talking about a 2% organic growth rate.

(technical difficulty) that would happen in Russia.

Absolutely. The West was really strong and Russia was extremely weak.

Thanks.

(Operator Instructions). Joe Radigan.

Thanks. Good morning. What is your gauge on channel inventory in Contractor? And did you benefit from any pull-forward in that plus 21% in Contractor Americas either ahead of a price increase or whatnot?

Yes, so the channel looks like it's got the right amount of inventory based upon what the end market conditions are. We are not overly concerned at this point. We do get some activity in December every year. I don't think anything that happened this year was unusual. I would say things were normal in terms of how we finished the quarter in terms of buying activity by the channel.

Okay. Then just to be clear, did the price increase go into effect January 1 or is that still ahead of us? And do you get the same magnitude of price realization in the home center channel as you do in propane?

If you're talking specific to Contractor, the price increase did not all go into effect on January 1, and it normally does not. There are some things that happen there from a timing standpoint either geographically or by channel that cause some variation there.

Typically what we will see is if we don't get pricing in the first part of January or in the first quarter, we are still getting the pricing compared to last year, and then we will get the new pricing at some other point in time. But no, you can't conclude that that was a January 1 price increase for everybody and that that drove a lot of buying behavior in our Contractor business. Typically, around the world, our pricing kicks in on January 1 but, again, there's not a set rule for that.

Okay. That's helpful. And then lastly, in the slides, you mentioned India as being favorable in Contractor. I just -- that doesn't seem like a market that has a compelling equipment ROI given the labor costs. So just I'm sure it's small, but what's driving that?

Some of the year-over-year volume increase we are seeing, it's off of a really small base. So we're just trying to quote from the geographies where we are seeing a favorable movement.

There are opportunities for us. Their labor rates are low, so that creates challenges for us on that conversion, but there are people that are spraying, and also line striping over there provides us opportunities, things like airports.

Okay. Thank you very much.

Jim Giannakouros.

Good morning. Thanks for taking my question. As far as China, if you can give us a little more color on the spottiness that you cited. Can you talk about where you are seeing relative strength and weakness I guess outside of the Contractor segment that you kind of called out earlier?

Yes, we've had some parts of the business that have done relatively better than others, but, frankly, over the course of the last three years, what we've just seen is we've just seen overall I'm going to say flat to low kind of growth performance and variation between product lines and countries -- or excuse me, product lines and segments quarter to quarter. And so we have a fair amount of exposure to automotive in China, and some of that is project-based, so we are watching our project pipeline. Certainly in 2015, we saw some of the projects get pushed out to 2016. Whether they will actually execute on those in 2016 or push them again, I don't know. But it's been hard for us to really get our arms around it in terms of predicting what's going to happen in the short-term. A lot of that business is pretty quick book-to-bill, and we continue to be interested each month in terms of what we are seeing actually come through the door. So, I don't think I can provide you a lot of help in terms of what's happening in China other than to say that the number is just bouncing around, but it's bouncing around at a growth rate that's certainly not like it was prior to two or three years ago.

Fair enough. If I can switch over to your liquid finishing end markets there, since the sale, have you seen any aggressive pricing there or are things pretty rational in your channel there?

Generally speaking, the customers in that space are looking to buy products that add the most value to their operation. The capital equivalent cost, it does matter, but certainly the quality of their throughput, the speed of throughput and their ability to reduce their material and energy consumption continue to drive the day. So, generally, successful competitors in that space are trying to win on performance and not necessarily on who has got the lowest price. And I haven't seen really the competitive market dynamics change from that standpoint. It tends to be aggressive competition, but really trying to win by having the best product.

That's helpful. Thank you. And last one, in Contractor, can you update us on the progress that you've made on selling the more highly engineered or the higher margin equipment there, how much of an impact it's had in 2015, both in sales and to your margin?

We are making progress in that area, and we just looked at the data actually for 2015. And it did have a favorable impact within the paint store channel, but as we've talked about before, if you look at the overall Contractor business, it's not really going to come through because of the fact that we are selling more into the home center today, so that is diluting the impact from that.

We do have some runway left on the recovery, in particular the very large high-performance units. We are still missing sales that were there back in the 2006/2007 time frame, so we are still -- we still have runway left on that recovery.

Thank you.

Jim Foung.

Good morning Pat, Christian. I was wondering, could you separate the growth you saw in your residential construction market versus the nonresidential? It seems like the nonresidential construction really hasn't picked up as much and I was just wondering if there's more upside from that market to your business.

Yes, it's impossible for us to sort that out. Remember we sell a paint sprayer to a channel partner who sells it to a contractor and that contractor could be painting a house with it or they could be painting a church with it or a barn or a new apartment complex. We really don't know where they are going to take that product. We know larger jobs use larger sprayers. So we can take some stabs at whether the painting projects are getting bigger or not, but it's impossible to give that kind of detail.

Okay. But anecdotally you just feel that nonres hasn't really participated as much as res?

Our view is that nonres is okay this year, but again you have to take -- if you're interested in nonres, you can really parse that into a lot of pieces. You can take a look at how different segments are doing. But overall we thought nonres was okay in 2015 and we are expecting it to be okay in 2016.

Okay, good enough. And then you have a $6 million share buyback program. It looks like you bought back $3.9 million to date. Do you have a timetable for the rest of the purchase? I think your total shares -- your basic shares outstanding at the end of Q4 was 55.8 million. Is that correct?

Yes, that's correct. That's data we disclosed last night in our conference call slides. So we don't have a specific timeline. Right now, we are more in an opportunistic mode. And so as the market pulls back, we use that as an opportunity to go out and buy back shares. We want to obviously continue to be diligent about that and be thoughtful around the valuation, and so we just wait for opportunities.

Okay. And then last I guess to your elevated inventory level, it's just been creeping up because of the acquisitions and the growth in the business. There's nothing more to that then?

Yes, I don't anticipate -- you see that turning around. Part of that's been acquisitions and part of it has been us trying to improve our overall in-stock service levels. We do think that's a competitive advantage for the Company. And especially with some of the large demand that we've seen in Contractor, and some of that demand has been difficult to predict, we want to make sure we are there to serve those channel partners and customers when they need the product. So we have definitely been investing more.

Okay. Great. Thanks so much.

Walter Liptak.

Thanks guys, and great end to the year. I wanted to ask one question about the acquisitions that you've completed in the last year, year plus. How are you feeling about those? Some of the end markets I think were a little bit more kind of commodity, oil and gas related. How are they coming along, how are the integrations going, etc.?

I would say that from being able to do the kinds of things that we think we can do to improve margin performance and take out manufactured cost, we feel pretty good about the deals and we've got a lot of activities underway. We are not really putting anything on hold because of the revenue challenge that some of those businesses have.

In terms of our timing of when we bought them and what we paid, obviously we caught a couple of them at the peak, and it would be nice to have a do over, but that's not going to happen. So I would say, given the environment that we have, we are optimistic about the businesses. We think that they are going to be contributors to Graco's long-term profit potential, and we're going to keep working on them.

Okay. In thinking of a previous question, you started to get at some of this. But I wonder if you can help us understand the new product spend for 2016 versus 2015, operational improvement efforts kind of going in 2016, and any other special projects that you guys might be working on that will either be a cost or a benefit in 2016?

We've kind of got a playbook that we follow. And I view 2016 as being very straightforward in terms of how that's going to move. There may be some incremental spend in product development in 2016 but it's not going to be significant. We don't have any current plans to make a major investment. We have a large new team in that space, so there may be some cost pressures in terms of wages or whatever, but nothing dramatic.

Our cost performance, our continuous improvement in quality and customer service and cost-outs, those things are ongoing. They are not really project-based. Every one of our factories and every one of our engineering groups has got an ongoing list of opportunities in those spaces, and they execute those and we review those on a quarterly basis.

So, I look forward into 2016. I think kind of the big thing is going to be whether we get a little bit of volume, because a little bit of volume through our factories, it really helps us. Obviously if we come up with a cost reduction and we can run it across to higher unit volume, that's nice, but also the absorption overhead and other fixed costs. So we get some volume. I think 2016 is going to be just fine.

Okay. And I think, in the opening comments, there was a comment that was made about Contractor being at full capacity. Did I hear that right? And if that's right, what are the implications of that?

We said nearing full capacity, and that's really space. That's not manufacturing output. Although we run our machines pretty heavily five days a week around the clock, we can flex the machines on weekends. And we run our assembly at maybe 1.25 shifts so we can flex our assembly. But ultimately the building just starts to get buildup, and that's really where we are at. And we've been at -- but with the growth we saw in 2015, it's really made the situation a little bit worse.

So, we can continue to get by for a while. It's certainly not going to be an issue for us at all in terms of being able to serve the customer. It's not an external issue. It's completely an internal issue and we'll make sure we invest in the space that we need but we are going to do it planfully and we're going to do it at the right time.

Okay. Is there any positive or negative for margins if you are nearing full capacity?

Obviously, being busy has been better for margins and growth is better for margins. Nothing beyond that.

Okay. Thanks very much.

(Operator Instructions). Mario Gabelli.

Good numbers. I've been grazing a little. But the $49 million that you expended for deals, what's the revenue? Did you guys release any financials as to incremental revenues?

$16 million.

Thank you. And secondly, to hitchhike on a couple of questions on your capacity expansion and (technical difficulty)

(technical difficulty) -- But we are probably looking somewhere between [10] and [20].

And in terms of 30,000 feet looking down, you've got a highway bill that has been missing for a long time. You've got the military coming back. But more mundane, assuming oil gets up to X dollars and they start ramping back up on some of these, how quickly do you benefit based on your knowledge of the past three or four cycles in the oil patch?

So, I've got very little knowledge of the last three or four cycles (multiple speakers)

Come on, you're just hiding behind your youthful age.

Hiding behind my ignorance, that's right. What we are doing right now is we are concentrating really hard on driving the manufacturing performance improvements and facility consolidations that we had expected to do. We didn't call a time out to those because revenue is down. We're taking a hit. We're putting the new machines in place. We are consolidating the facilities. We're working on process improvement.

You're doing your playbook all the time.

Got to be ready to go when it comes back.

Got it. But no sense of how quickly -- where you are in terms of that recovery let's say in the spring of 2017 or something like that? I've just got to look for the other side of this curve.

Yes, I have no idea.

And the highway bill?

The highway bill should be good for us (technical difficulty) several different business segments. So it should be a positive.

Have a great year. Thanks Pat. Thanks Christian.

Thank you. It appears we have no further questions at this time. I will now turn the conference back over to Pat McHale. Please go ahead.

All right. Thanks, everyone, for joining our session this morning, including the lively Q&A. Have a great rest of your day.

This concludes our conference for today. Thank you for your participation and have a nice day. All parties may now disconnect.